DC Consultants Adjust Offerings to Address New Trends

The defined-contribution (DC) plan consulting business is changing to adjust to new plan trends by, among other things, offering custom target-date funds and adding inflation-protection investment vehicles to fund offerings.

The PIMCO 2008 Defined Contribution Consulting Support and Trends Survey found 79% of consultants believe target-date strategies will be the most prevalent default investment in defined contribution plans within the next several years, according to a press release. About two-thirds (68%) of the firms surveyed indicated they actively promote the value of custom target-date strategies.

Most consultants (90%) said they believe plan sponsors should consider creating their own custom strategies once plan assets exceed $1 billion, the press release said. Even at $200 million in assets, nearly two-thirds (62%) believe custom strategies may make sense for DC plans.

Volatility of returns and fees were considered the most important factors for plan sponsors considering creating their own or selecting a packaged target date product by 28% of the consultants surveyed, but over a third of consultants (38%) indicated they believe sponsors are likely to consider the probability of meeting a retirement-income adequacy goal as the most important factor.

Among the services provided by consultants surveyed, glide path management is offered by 76%, 95% of the firms are accepting fiduciary responsibility, and 55% indicated they are willing to act as an investment manager.

As the dependence on DC plans as the primary source of retirement income increases, PIMCO also found two-thirds of investment consultants believe it is critical or very important to provide inflation protection in a DC plan. The majority said that preferred asset classes for inflation protection are Treasury Inflation-Protected Securities (TIPS), followed by commodities and real estate, but they also see value in high yield and global fixed income asset classes.

Other survey findings include:

  • 69% of consultants reported having a dedicated DC team,
  • 62% use their own proprietary asset allocation models,
  • 66% said a liability-driven investment approach is applicable within a DC plan, and
  • 67% reported plan sponsors are somewhat to highly likely to add a guaranteed income option within their DC plan, with a guaranteed minimum withdrawal benefit most likely.

The survey captured data, trends, and opinions from 29 consulting firms across the U.S. that collectively serve more than 1,400 clients with aggregate DC assets of nearly $1.4 trillion. Survey highlights can be obtained by emailing pimcopractice@pimco.com.

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Asset Allocated Funds Grow As Retirement Assets Increase

Total U.S. retirement assets climbed to $17.8 trillion as of September 30, 2007, up from $17.5 trillion on June 30, 2007, according to a quarterly data series from the Investment Company Institute (ICI).

The ICI data show retirement savings account for almost 40% of all household financial assets in the United States. IRAs held $4.8 trillion of retirement assets at the end of the third quarter of 2007, while employer-sponsored defined contribution plans held $4.5 trillion – of which $3.1 trillion was held in 401(k) plans, ICI said.

Lifecycle funds, or target-date funds, managed $168 billion of retirement assets at the end of the third quarter of 2007, compared to $153 billion at the end of the second quarter. Almost 90% of assets held in lifecycle funds are from retirement accounts, ICI found.

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In addition, lifestyle funds, or target-risk funds, managed $234 billion as of September 30, up from $221 billion on June 30. Almost half of assets held in lifestyle funds are from retirement accounts.

The ICI data also showed mutual funds managed 47% of IRA assets and managed $2.4 trillion in assets in 401(k), 403(b), and other defined contribution plans at the end of the third quarter of 2007. Mutual funds managed 53% of defined contribution plan assets.

Over $1.7 trillion in defined contribution plan assets were invested in equities as of September 30, 2007, while $365 billion was invested in hybrid funds, $176 billion in bond funds, and $126 billion in money market funds.

Complete ICI data can be obtained here.

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